NOTE: THE NEW DELAWARE

+(,1CORPORATION
21/,1( LAW
I. INTRODUCTION
Citation: 5 Harv. J. on Legis. 413 1967-1968
The new Delaware General Corporation Law,1 effective July 3,
1967, has substantially transformed the prior Delaware Corporation
statute.2 The Delaware legislature, while originating a significant
number of provisions, has also borrowed from other sources, such as
the American Law Institute's Model Business Corporation Acte and
the New York Business Corporation Act.' Not only are there numer-
ous substantive changes, but few provisions have escaped modification
inlanguage either simplifying the wording or clarifying the meaning.5
In addition to the substantive and language changes,6 the law has
been modified to provide less involved procedures and has been
updated to conform to new business conditions and to other law. Ex-
Content
amples downloaded/printed
of procedural from method for filing docu-
reform include a uniform
mentsHeinOnline (http://heinonline.org)
with the state;' a simplified voting procedure for amendment
8
Mon Jul 27 20:08:57 2015
of the certificate of incorporation; and the elimination of the require-
ment that a chancery judge supervise a vote for dissolution.' The
updating of the
-- Your use corporation law to conform
of this HeinOnline PDFto indicates
modem business
your condi-
acceptance
tions is exemplified by a provision permitting records to be kept by
of HeinOnline's Terms and Conditions of the license
utilizing modem data processing techniques so long as the records can
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be readily converted into legible form." A further illustration is the
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-- The search text of this PDF is generated from
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1. DEL. GEN. CoRP. LAw tit. 8, 101-398 (PRENTicE-HALL Corporations, 1967).
[Hereinafter cited by section only].
2. DEL. CODE ANN. tit. 8, 101-368 (1953) repealed July 3, 1967. [Hereinafter
cited --
as To
1953 obtain
Law]. permission to use this article beyond the scope
of your
3. ABA-ALI HeinOnline
MODEL license,
Bus. CoR'. Acr, please
8, 11, 16, 39, use:
117 (1962) [Hereinafter
referred to as Model Act].
4. N.Y. Bus. CoRP. LAw 713 (McKinney 1963).
5. Forhttps://www.copyright.com/ccc/basicSearch.do?
example, the wording of 121, 123, and 261 has been changed signifi-
cantly while the substance of the provisions has not been changed.
6. The&operation=go&searchType=0
more significant substantive changes are discussed infra pp. 414-27.
7. 103. Formerly provisions for filing documents were specified for each docu-
ment to&lastSearch=simple&all=on&titleOrStdNo=0017-808X
be filed. To illustrate the significance of the change, the following pro-
visions are among those adopting the procedure of 103: 133, 135, 151, 241,
245, 246, 251, 255, 275, 303, 311 and 312.
8. 242 (d).
9. 275.
10. 224.
414 Harvard Journal on Legislation [Vol. 5: 413

office" for "resident agent" and "principal office,""1 reflecting the fact
that very often the agent for a corporation is agent for many corpora-
tions and is maintained solely to meet statutory requirements while all
significant corporate operations are conducted outside of the state.12
The updating of the law to conform to other statutes is exemplified
by a provision13 incorporating the Uniform Commercial Code - In-
vestment Securities Article 4 and a provisionr' permitting restrictions
on transfer of securities in conformance with Subchapter S of the
Internal Revenue Code. 6

II. SUBSTANTIVE CHANGES

Discussion of each of the many substantive changes embodied in

the new corporation law is beyond the scope of this comment.' 7 Items
were chosen for discussion either because they represent significant
modification of prior law (close corporations), clarification of prior
law (ultra vires; interested directors; mortgage of all of the assets),
or innovation in the law (director liability for unlawful stock redemp-
tion; merger and consolidation; waiver of notice of meetings).

A. Close Corporations

The 1953 statute treated close corporations no differently than

publicly held corporations. New Subchapter XIV sets forth special
provisions for close corporations which provide considerable flexibility
in their management.
A corporation may qualify as a close corporation by providing in its

11. 131, 132.

12. The change in terms is in consonance with Model Act 11.
13. 201.
14. DEL. CODE ANN. tit. 5a, ch. 8 (Supp. 1967).
15. 202(d).
16. INT. REV. CODE Of 19541, 1371-78.
17. Some of the changes that are not discussed include: Par stock is assessible
up to the amount of the issue price rather than only up to the par value. 162.
Written stock subscriptions are irrevocable for six months unless otherwise agreed.
165, 166. Stockholders are given greater latitude as to when they have the
right to examine the stock ledger, but such examination is conditioned on a proper
purpose. 219, 220. The rights of bondholders to vote need not be conditioned
on default of payment. 221. Stockholders dissenting from a merger do not have
appraisal rights if the stock of the corporation is registered on a national securities
exchange or is held by not less than 2,000 stockholders. 262(k).
1968] Delaware Corporation Law

certificate of incorporation' (1) that issued stock may not be held by

more than a specified number of persons not exceeding thirty; 9 (2)
that all stock must be subject to one or more of the restrictions on
transfer permitted by 202 ;20 and (3) that no offering of its stock
be made that would constitute a "public offering" within the meaning
of the Securities Act of 1933.21 A corporation may elect to become
a close corporation by amending its certificate of incorporation by a
2/3 vote.22
Under the close corporation provisions, written agreements made by
holders of a majority of the shares of a close corporation will not be
invalid on the grounds that the agreements limit the discretion of the
board of directors.23 Were it not for this new subchapter, the enforci-
bility of such agreements w.ould be in doubt in light of 141 (a) which
requires that except as otherwise provided in the Corporation Law or
in the certificate the board of directors shall manage the business of
the corporation.24
Under the new law, these agreements limiting the discretion of the
directors may be made with non-stockholders.2 ' This provision is to
some extent in conflict with the policy behind the requirement that
the stock of the close corporation be subject to restrictions on transfer.2"
This policy would appear to be to permit the original stockholders

18. This inclusion in the certificate is in addition to the provisions required of

all corporations by 102.
19. In Bradley, Toward a More Perfect Close Corporation- The Need for More
and Improved Legislation, 54 GEo. UJ. 1145, 1189-90 (1966) [hereinafter cited
as Bradley], the suggestion is made that the number of stockholders be restricted
to ten, since that is the maximum number of stockholders permitted for a cor-
poration to be eligible for small business corporation status under the Internal
Revenue Code. INT. REv. CODE of 1954, 1371.
20. For example, the following restrictions are valid under 202: restrictions
on the sale of stock without first offering the corporation the opportunity to pur-
chase the stock, restrictions on the transfer of stock without the consent of the
corporation, restrictions to maintain status as small business corporation under
Subchapter S, INT. REV. CODE of 1954, 1371-78.
21. 342. Securities Act of 1933, 15 U.S.C. 77a-77aa (1933).
22. 344.
23. 350.
24. Abercrombie v. Davies, 35 Del. Ch. 599, 123 A.2d 893 (1956); McQuade
v. Stoneham, 263 N.Y. 323, 189 N.E. 234 (1934). See generally Delaney, The
Corporate Director: Can His Hands Be Tied In Advance, 50 COLUM. L. REv. 52
(1950). Even under this new provision there is a question as to how the agree-
ment will be enforced; eg. whether the provision will be specifically enforced. See
Ringling Bros.- Barnum & Bailey Combined Shows v. Ringling, 29 Del. Ch. 610,
53 A.2d 441 (Sup. Ct. 1947).
25. 350.
26. 342.
 Harvard Journal on Legislation [Vol. 5 : 413

to have some control as to who would participate in the corporation

and a fortiori who would manage the corporation." As a result of the
power of the majority to make agreements limiting the discretion of
the board of directors, the minority stockholder may find that the
power to manage the corporation not only is no longer in the hands
of his fellow incorporators, but is held by a party who as a creditor
has interests contrary to those of the minority stockholder.
Some protection is afforded to minority stockholders in that these
agreements are binding only on the parties to the agreement." How-
ever, in the case where the majority stockholders are also directors, the
agreements, in effect, can bind the corporation. On the other hand,
permitting agreements with non-stockholders which limit the discretion
of the directors does add flexibility to close corporations in their deal-
ings with creditors and non-stockholding managers. This flexibility is
especially desirable in close corporations which often have limited
access to risk capital and expert management and cannot demand
either on the corporations' own terms.
The certificate may provide that the business of a close corporation
shall be managed by the stockholders rather than the board of direc-
tors.2" This option to permit shareholders to manage the business is
a significant departure from the modus aperandi typically associated
with corporations: management by the board."0 Apparently recogniz-
ing the extent of this departure, and to protect minority shareholders,
the Delaware legislature required that the exercise of the option be
embodied in the certificate, that such a provision may be inserted by
amendment to the certificate only if there is a unanimous vote of all
of the stockholders, and that the provision may be amended out of the
certificate by only a majority vote. These safeguards are substantial
in comparison to the requirement that agreements limiting the discre-
tion of the board can be made by shareholders holding only a majority

27. A transfer of stock inconsistent with the terms of the certificate may result
in the termination of close corporation status. 348.
28. 350.
29. 351. Florida's corporation has a similar provision. FLA. STATS. ANN. 608.
0102 (1966 Supp.).
30. See Kessler, The Statutory Requirement of a Board of Directors:A Corporate
Anachronism, 27 U. Cir. L. REv. 696 (1960) [Hereinafter referred to as Kessler];
See also Long Park, Inc. v. Trenton-New Brunswick Theatres, 297 N.Y. 174, 77
N.E.2d 633 (1948) which held illegal an agreement by all of the stockholders that
the class A stockholders should have the exclusive power to manage the corporate
business.
31. 351.
 1968] Delaware Corporation Law

of the shares.3 2 Since the difference between management by a board

of directors subject to an agreement limiting its discretion and manage-
ment by the stockholders is only a matter of degree, the disparity in
the protection offered to the minority stockholders seems unwar-
ranted 3 and could be partially rectified if the courts required some
minimum protection of the rights of the minority stockholders; e.g.,
notice of the agreement.
The invalidity in Delaware of a provision in the certificate of in-
corporation of a publicly held corporation conferring the management
of the corporation on the stockholders is not clear from the statutory
language alone. Section 141 (a) reserves the power of management of
the business to the board of directors "except as may be otherwise
provided in... the certificate." Section 141 (a) would not invalidate
a provision in the certificate which places the management of the cor-
poration in the hands of the stockholders unless the provision is not
properly includible in the certificate. To be properly includible in the
certificate, such a provision must not be contrary to the laws of the
state."' The statute does not expressly declare unlawful a provision
vesting management of a publicly held corporation in its stockholders.
There is a general judicial tendency to require that a corporation be
governed by a -board of directors.35 However, the Delaware Court in
Mayer v. Adaons,3 s decided in 1957, implies in dictum that a corpora-
tion may exist without a board of directors if the certificate so provides.
If a dose corporation is managed by stockholders and there is a
deadlock impairing the business of the corporation, a custodian may
be appointed by the court of chancery." This procedure supplements
another new procedure whereby a custodian may -be appointed by the
court of chancery if the board of directors is deadlocked." As an
alternative procedure, a provisional director may be appointed by the
court of chancery to break a deadlock in the board of directors of a

32. 350.
33. Bradley, supra note 19, at 1187, argues that such agreements should be re-
quired to be signed by all shareholders.
34. 102 (b) (1).
35. Seen generally Bradley, supra note 19; Kessler, supra note 30.
36. 36 Del. Ch. 466, 133 A.2d 138 (1957).
37. 352.
38. 226. This section applies equally to dose and publicly held corporations.
418 Harvard Journal on Legislation [Vol. 5: 413

close corporation." A provisional director differs from a custodian in

that the former is only an additional director and control is left in
the board, while the latter takes over the management of the corpora-
tion. This distinction is of importance with respect to issues as to
which the board is not deadlocked, in that a custodian could enforce
a position contrary to that of a majority of the board while a provi-
sional director could not. It is also important as to issues with respect
to which more than two positions may be taken. A custodian can
enforce a position other than one of the two espoused by the respective
sides of a deadlocked board, while a provisional director would not
be able to do so except through compromise.
Under another new section no written agreement or provision in
the certificate or by-laws is invalid on the ground that it is an attempt
to treat a close corporation as a partnership."0 In the past, courts
have not looked favorably on agreements purporting to treat corpora-
tions as partnerships.41 There has been a general judicial tendency
to treat "incorporated partnerships" as partnerships: to require as a
price for limited liability the maintenance of corporate form.4" As
long as creditors are put .onnotice of the limited liability of a close
corporation such a judicial practice seems totally unwarranted. This
new provision eliminates any doubt as to the validity of a multitude
of arrangements 4 3 and permits close corporations to arrange their man-
agement, dividend, and arbitration agreements to conform to intended
practice.
The certificate of a close corporation may now grant any share-
holder or the holders of a specified number or percentage of shares the
option to have the corporation dissolved at will or upon the occurrence

39. 353. Cf. Lehrman v. Cohen, 222 A.2d 800 (Del. 1966), decided before
enactment of the new law, upholding a unanimously adopted amendment to the
certificate which was designed to create a deadlock-breaking device by creating a
new class of nonparticipating voting stock consisting of one share which was issued
to a new director.
40. 354. The Florida and North Carolina corporation laws also permit agree-
ments to treat corporations as partnerships. N.C. GEN. STAT. 55-73b (1965); FLA.
STATS. ANN. 608.0105 (1966 Supp.).
41. See generally Bradley, supra note 19, at 1148-50.
42. Id.
43. Such arrangements include, for example, giving each stockholder a single
vote regardless of the number of shares, dividing "profits" so that salaries and
dividends are allocated according to certain formulas, and establishing beforehand
who will be elected to the board of directors. For a provision permitting voting
pool agreements for both close and publicly held corporations see 218 (c).
1968] Delaware Corporation Law

of any specified event. 44 The dissolution after the exercise of the op-
tion, notice thereof, and a thirty day waiting period then proceeds as
would any other dissolution. 45 This provision eliminates the necessity
of a 2/3 vote for dissolution and the necessity of the board of directors
initiating the dissolution.48 Although a similar result could be achieved
by creating a voting trust under 218, this new close corporation pro-
vision avoids problems inherent in the use of the voting trust. These
problems include possible difficulties in obtaining specific enforcement;
a ten year limit on the term of the trust; and the possible inability of
a voting trust to compel the board of directors to initiate a dissolution.
Apparently the new provision does not affect the general requirements
of the dissolution plan; e.g., the fairness of the dissolution plan to
47
minority shareholders.
Taken as a whole the new subchapter 8 provides much needed flex-
ibility4" in the management of close corporations. Delaware has cor-
rectly recognized that close corporations do not operate in the mold
of the public corporation" and that so long as the rights of minority
shareholders are preserved and so long as outsiders are put on notice
of major variations, little is to be achieved by attempting to force them
into that mold.

B. Ultra Vires

Section 124 of the new corporation law partially codifies and par-
tially modifies the common law doctrine of ultra vires.51 In general,
no completed act or transfer of property can be invalidated because
the corporation was without power or capacity to effect the transaction

44. 355.
45. Id.
46. 275.
47. See Shrage v. Bridgeport Oil Co., 31 Del. Ch. 203, 209, 68 A.2d 317, 320
(1949).
48. For related provisions not contained in Subchapter XIV, see 101 which
permits a single incorporator, and 141 (b) which permits one or two directors
where there is only one or two stockholders.
49. Bradley, supra note 19, at 1195; Kessler, supra note 30.
50. Kessler, supra note 30, at 717-718. As to close corporations, "neglect of ...
formalities is the rule rather than the exception, as has so often been pointed out.
Yet such neglect may give rise to unfortunate consequences. .. "
51. 124 is almost identical to Model Act 6 derived from ILL. ANN. STATS.
ch. 32, 157.8 (1954).
420 Harvard Journal on Legislation [Vol. 5: 413

or transfer." An unauthorized act or transfer may be enjoined in the

court of chancery in a proceeding by a stockholder. " The court of
chancery may enjoin the performance of a wholly executory contract
or set aside the performance of a partially performed contract if all
of the parties to the contract are parties to the proceeding. The court
also may award compensation for loss or damage sustained by any
of the parties resulting from the enjoining or the setting aside of the
performance of the executory contract, although such an award may
not include anticipated profits." The corporation (including trustees
or stockholders in a representative suit) may assert the corporation's
lack of capacity or power in a proceeding against an officer or director
for loss or damage due to his unauthorized acts." The Attorney Gen-
eral may have the corporation enjoined from carrying out an ultra
vires act." This section makes it clear that ultra vires may not be
invoked by a third party, such as one who contracts with a corporation,
since the use of the doctrine of ultra vires is limited to the stockholders,
57
the corporation and the Attorney General.
The opportunity for use of ultra vires may be significantly dimin-
ished if the corporation elects under new 102(a) (2) to include in
its certificate of incorporation a provision that the "purpose of the
corporation is to engage in any lawful act or activity for which cor-
porations may be organized under the General Corporation Law."
Inclusion of such a provision obviates the necessity of listing in the
certificate all activities that may be engaged in at some time in the

52. See Delmarva Poultry Corp. v. Showell Poultry Corp., 54 Del. 472, 478, 179
A.2d 796, 799 (1962), holding that completed transactions may not be overturned.
See also Healy v. Geilfuss, 37 Del. Ch. 502, 510, 146 A.2d 5, 10 (1958).
53. A stockholder may not complain of corporate action in which, with full
knowledge of the facts, he has concurred. Elster v. American Airlines, 34 Del.
Ch. 94, 96, 100 A.2d 219, 226 (1953).
54. 124 (1).
55. 124(2). An unauthorized act by an officer or a director is to be distin-
guished from an ultra vires act by the corporation. For example, a declaration
of dividends might be clearly within the power of the corporation; however, the
payment of a dividend by an officer without prior approval by the board of direc-
tors would be an unauthorized act. Section 124 (2) does not refer to this situation.
Rather, 124(2) refers to the directors' or officers' action being unauthorized
because the corporation was without power to act.
56. 124(3).
57. 124. See Graham v. Young, 35 Del. 484, 489, 167 A. 906, 908 (1933),
where it was held that only one who can show violation of some duty owing
to himself can invoke ultra vires; Philadelphia, W. & B. R.R. v. Wilmington City
Ry., 8 Del. Ch. 134, 144, 38 A. 1067, 1070 (1897).
1968] Delaware Corporation Law

future and the necessity of amending the certificate if a particular

activity was not initially included. 58 Its inclusion eliminates the pos-
sibility of ultra vires acts occurring as a result of oversight in amend-
ing the certificate or because of mistaken judgment as to the extent
of the corporation's powers as specified in the certificate.
Consonant with these new statutory provisions are the new statutory
powers granted by 122(10)-(16), some of which previously might
have raised ultra vires problems. These powers include the right to
be an incorporator,"9 to participate with others in any partnership or
association, 0 to do any lawful business in aid of a national emer-
gency, 1 to make contracts of guaranty, 62 to create pension, profit
sharing, and stock option plans,63 and to insure the lives of employees."
The prohibition against a religious corporation being a recipient of
bequests has been deleted in the new law. 65 These changes would
appear to be salutary. They seem to recognize the changing character
of the modem business corporation in that businesses are often formed
for the purpose of conducting multiple operations,60 that modem com-
pensation plans typically include pension, profit sharing and stock
option plans, and that a significant financial loss to a corporation can
result from the death of a key employee.
Analagous to the provisions concerning ultra vires are the provisions
concerning foreign corporations unauthorized to do business in Dela-
ware.6" A foreign corporation doing business within Delaware and
not complying with registration provisions may not maintain any judi-
cial action or special proceeding in the state unless it becomes author-
ized to do business.6 8 However, the validity of any contract or act
of the foreign corporation shall not be impaired and the corporation
may defend any suit.6" The court of chancery may enjoin any unau-

58. Such a provision would be of special value to conglomerate corporations.

59. 122(10), 101.
60. 122(11).
61. 122(12).
62. 122(13).
63. 12(15).
64. 122(16).
65. 1953 Law '121(4).
66. Eg., conglomerate corporations.
67. 383-4. This provision is substantially the same as Model Act 117.
68. 383.
69. Id.
 Harvard Journal on Legislation [Vol. 5: 413

thorized foreign corporation from doing business in the state."'

A policy common to the provisions concerning both unauthorized
foreign corporations and ultra vires is the avoidance of disruption of
completed transactions, thus protecting third parties from harm. This
policy decision seems clearly sound. Where an executory contract is
enjoined as ultra vires, the third party is protected by the fact that
he can obtain damages for any loss sustained as a result of his reliance
on the contract.7 Where the third party contracts with a foreign
corporation unauthorized to do business in Delaware, the validity of
the contract is not impaired. 2

C. Interested Directors

Prior to the enactment of the 1967 law there was no statutory pro-
vision concerning the position of a director who deals either directly
or indirectly with the corporation. New 144(a)" provides that such
contracts or transactions are valid if the director's interests are disclosed
and the board has in good faith authorized the transaction by a suffi-
cient vote, not counting that of the interested director;"4 if there is
a stockholder's vote in good faith specifically authorizing the transac-
tion after disclosure of the material facts of the interests and the trans-
actions;"5 or if the contract was fair to the corporation at the time it
was authorized. 8
Insofar as this provision permits the stockholders to ratify a trans-
action which was unfair to the corporation at the time of the transac-
tion, 7 there is a departure from the prior case law.' This departure
does not seem justified, since apparently only a majority vote is re-
quired to ratify the transaction. Thus, the value of the interests of
the minority stockholders may be adversely affected without their con-

70. 384. See also 378, a reenactment of 1953 Law 349, which provides for
fines for doing business within the state without first complying with relevant
registration provisions.
71. 124(1).
72. 383.
73. For a similar provision, see N.Y. Bus. CoR'. LAw 713 (McKinney 1963).
74. 144 (a) (1).
75. 144(a) (2).
76. 144(a) (3).
77. 144(a) (2).
78. Gottlieb v. Heydon Chemical Corp., 33 Del. Ch. 82, 91, 90 A.2d 660 (Sup.
Ct. 1952). An unconscionable deal cannot be validated by a vote of the stock-
holders.
1968] Delaware Corporation Law

sent. Some protection would be afforded the minority by the require-

ment that the ratification be in good faith. Other than this departure
144(a) appears to codify the case law."'
Section 144(b), which provides that interested directors are counted
in the quorum at the meetings of the board of directors at which the
authorization was made, is a direct reversal of the position which had
been taken by the Delaware courts." This reversal does not appear
to be justified insofar as it reduces the number of disinterested direc-
tors required to be present for such a vote and thus increases the
likelihood of authorization of action not in the interests of the corpora-
tion. Furthermore, the position taken by the courts could have made
impossible obtaining a quorum even with all of the directors present.
In such a situation, i-e., whenever the number of disinterested directors
did not equal a quorum, stockholder approval would have been re-
quired to validate the transaction. Such a result would appear to have
considerable merit in that case, in that one of the major purposes in
establishing quorum requirements is to insure that decisions be in the
best interests of the corporation. Where the decisions to be made in-
volve personal interests of members of the board of directors, the need
to protect the best interests of the corporation is most acute.

D. Unlawful Redemption

The liability of directors formerly resulting from the declaration of

unlawful dividends has been extended to the willful illegal redemption
of stock."1 A redemption of stock is unlawful when it occurs while the
capital of the corporation is impaired or when it would impair cap-
ital;83 a redemption of preferred stock is also unlawful when the re-
demption price exceeds the price at which preferred stock may be
redeemed.83 A director is protected against liability84 if he in good faith
relies ion the books of account of the corporation.

79. See, e.g., Kerbs v. California Eastern Airways, 32 Del. Ch. 219, 225 226, 90
A.2d 652 (1952).
80. Id.; Blish v. Thompson Automatic Arms Corp., 30 Del. Ch. 558, 580, 64 A.2d
581, 602 (Sup. Ct. 1948).
81. 174.
82. 160.
83. 243. New 243 (1) settles an unrelated problem by establishing that stock
called for redemption is not outstanding for voting purposes.
84. 172.
 Harvard journal on Legislation [Vol. 5: 413

Although director's liability has been extended to unlawful stock

redemption, the onus of the liability for unlawful dividends and stock
redemption has been partially alleviated through new provisions for
contribution from other directors voting or consenting to the unlawful
dividend or redemption, 5 and for subrogation to the rights of the
corporation against stockholders who had knowledge of facts indicat-
ing that the dividend or redemption was unlawful and who received
payment."8
The broadening of the statutory liability of directors to include un-
lawful redemption is in accord with the purpose behind liability for
unlawful dividends, which is to protect creditors from dilution of cor-
porate capital." Although the creditor is not protected completely
in that the corporation may become insolvent without declaring divi-
dends or redeeming stock, this new provision does afford the creditor
added protection.

E. Mortgage of All the Assets

The new Delaware corporation law provides that stockholder con-

sent for mortgage or pledge of corporate property is not necessary
except to the extent provided in the certificate.88 In so providing, the
new law has resolved an ambiguity which arose under the prior law
as to whether a mortgage of all of the corporate assets required stock-
holder approval.
Section 271 of the 1953 law required stockholder assent to the sale,
lease, or exchange of all of the assets of a corporation. Whether the
sale of all of the assets included the mortgage of all of the assets was
left unanswered by the statutory language. In Greene v. R.F.C." a
federal court construing Delaware law 0 stated in dictum that the
mortgage of all of the assets was a sale and therefore required stock-
holder approval. The court relied on a master's report which in re-
turn relied on two Massachusetts cases construing a Massachusetts
provision similar to that of Delaware. One of the cases was Commerce
Trust Ca. v. Chandler,91 which held that the policy behind the statute
85. 174(b).
86. 174 (c).
87. See Stratton v. Berles, 238 App. Div. 87, 263 N.Y.S. 466 (1933).
88. 272.
89. 24 F. Supp. 181 (D. Mass. 1938).
90. DEL. CoDE REv. (1935) ch. 65, replaced by 271,
91. 284 F. 734 (Ist Cir. 1922).
1968] Delaware Corporation Law

applied to the case where a mortgage of all of the assets secured a

demand note. Greene attempted to extend this to a mortgage securing
a time note without explaining why the policy of the statute so re-
quired. The Greene case, therefore, was probably of little value as
precedent and it is fair to say that the question remained open.
The manner in which the new statute has resolved the issue- by
providing that stockholder consent for a mortgage is not necessary
except to the extent provided in the certificate " - seems to be the
most desirable one. In general, the only disadvantages to a corpora-
tion which arise out of securing a note by mortgage are the restraint
on the alienation of the corporate property and an undermining of
the power to obtain other loans. In fact, though, it is often possible
to make provision in the mortgage agreement allowing the alienation
of specified property if other property is substituted. In addition, if
the company is in a situation where it is necessary to mortgage all of
the assets, it probably is in no position to obtain other loans. A mort-
gage does not change the rights of the stockholders93 upon dissolution.
Since upon dissolution all creditors are paid before stockholders, it is
immaterial to the stockholders whether debts are secured by mortgage
of corporate property or other form of indebtedness. The mortgage
only relates to the position of the mortgagee vis-a-vis other creditors.
The real issue is not the power to mortgage, but the power to borrow
substantial sums without stockholder approval.

F. Merger and Consolidation

The new law gives Delaware corporations new powers with respect
to consolidation and merger. When a corporation acquires another
corporation and the treasury shares and unissued stock to be exchanged
by the acquiring corporation do not exceed 15% of its outstanding
stock immediately prior to the merger, no approval by the acquiring
corporation's stockholders is needed so long as its certificate of in-
corporation does not have to be amended. 4 Delaware corporations
may merge with non-U.S. corporations if certain requirements are
met; e.g., the resulting corporation is a Delaware corporation. 95 Added
92. 272.
93. A stockholder-creditor can protect himself by having the certificate of incor-
poration amended to limit the power of the board to mortgage the assets. 272.
94. 251(f).
95. 256, 253 (e), 252(a). This accords with Model Act 2 defining foreign
corporations to include non-US. corporations.
 Harvard Journal on Legislation [Vol. 5: 413
flexibility is given to the board of directors in that even after stock-
holder approval of a merger, the board can abandon merger plans
without having to wait for a further stockholder vote."
Two of these new provisions, the elimination of the requirement of
stockholder approval for acquisition of small corporations 97 and the
granting of power to the board to abandon merger plans, 8 have the
effect of reducing the participation of stockholders in organic changes
in the corporate structure. 9 The new provisions seem to be justified,
though since the first does not result in a significant change20 and the
second provides desirable flexibility to counter such possibilities as ad-
verse tax consequences and changing business conditions.

G. Waiver of Notice

Under the 1953 law wherever notice of a meeting is required, a

written waiver of notice is deemed equivalent to notice."' The new
law extends waiver of notice to include attendance at a stockholder
meeting." 2 There is no waiver, however, if attendance is "for the
express purpose.0 3 of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called
or convened."'0 4 This right to object is analogous to the judicial pro-
vision for special appearance to object to jurisdiction of the court
without thereby submitting oneself to the court's jurisdiction.'
Whether the analogy is so complete that the person making the ap-
pearance to object to the meeting can also participate in the meeting
without waiving notice is an open question. Since the Delaware courts
have held that a stockholder who objected to the propriety of a par-
ticular corporate vote and then participated in the vote did not lose
96. 251 (d).
97. 251 (f).
98. 251(d).
99. This is unlike 272 giving the corporation the right to mortgage, in that
272 does not entail an organic change in either the formal or practical sense.
See discussion supra at 424-25.
100. No more change is involved than the issue of an equivalent amount of un-
issued shares and the use of the proceeds to purchase the assets of another cor-
poration.
101. 1953 Law 229.
102. 229.
103. Presumably, this purpose must be evidenced by some objective evidence
such as actually objecting or attempting to object.
104. 229.
105. See, e.g., Harkness v. Hyde, 98 US. 476 (1878).
1968] Delaware Corporation Law

his right to object to the vote, 10 6 it is likely that participation in the

business of a meeting would not be construed as a waiver when the
participant first objected to the transaction of the business. Such a
construction makes sense in that, otherwise, the stockholder objecting
to the meeting is deprived of his votes if he erroneously decides the
meeting was invalid.

III. UNRESOLVED PROBLEMS

Although the new law answers many questions heretofore unan-

swered, many problems are still unresolved.' 7 This section deals with
two of these questions. The first apparently was intentionally left
unresolved by the Delaware legislature. The second involves an appar-
ent conflict between two provisions.

A. Removal of Directors

Section 141 (b) refers to the possibility of the removal of directors.

However, nowhere in the General Corporation Law is there any
mention of whether removal is to be only with cause,' whether there
can be removal without cause (with or without provision for removal
without cause in the by-laws or certificate),"'0 or whether the by-laws
or certificate may provide that directors cannot be removed. The
leading Delaware case is Campbell v. Laew's"10 which holds that
stockholders have an inherent and unalterable right to remove direc-
tors for cause. The legislature's failure to indicate whether a by-law
or certificate provision permitting removal of directors without cause
is valid raises other questions. If, for example, a court holds that such

106. Ringling v. Ringling Bros.-Barnum 8- Bailey Combined Shows, 29 Del. Ch.

319, 325, 49 A.2d 603, 606 (1946), modified on other grounds 29 Del. Ch. 610, 53
A.2d 441 (Sup. Ct. 1947).
107. Examples of unresolved problems include the whole question of de facto
merger, the enforceability of voting trust agreements, and the liability of directors
for mismanagement.
108. New York, Pennsylvania, and California, for instance, have statutory provi-
sion for removal for cause. N.Y. Bus. CoRP. LAW 706(a) (McKinney 1963);
PENN. STATS. tit. 15, 1405 (Supp. 1967); CAL. Bus. CODE 810 (West 1947).
109. New York permits removal without cause if provision is made in the
certificate. N.Y. Bus. Core. LAw 706 (b) (McKinney 1963).
110. 36 Del. Ch. 563, 134 A.2d 852 (1957).
 Harvard Journal on Legislation [Vol. 5: 413

a provision is valid, ll it may also have to decide how to protect

cumulative voting rights.11 2
If there is a determination that directors can be removed only for
cause or that special procedures must be utilized if there is to be re-
moval without cause, the definition of what constitutes cause and the
delineation of appropriate procedures for determining whether cause
exists are crucial. However, the statute offers neither definition of
cause," 3 nor delineation of appropriate procedures. A single set of
procedures for determining whether cause exists might not be appro-
priate. The procedure suitable for a small corporation might well be
different than the procedure suitable for a large corporation. On the
other hand, general criteria could be established so that minimun.
protection of the interests of the director and the stockholders coulct
be insured. 1 4 Apparently, the framers of the 196.7 law were content
to allow the judicial process to derive these criteria of fairness.

B. Management by the Board of Directors

Section 141(a) in the 1953 law provided that "the business of

every corporation... shall be managed by a board of directors, ex-
cept as hereinafter or in the certificate of incorporation otherwise pro-
vided" (emphasis added)."' The new law reenacts this provision
except that "in this chapter" is substituted for "hereinafter," thus sub-
jecting 141(a) to the provisions preceding 141 as well as those
following it. Section 109(b) contains a new provision that "by-laws
may contain any provision, not inconsistent with law or with the cer-
tificate of incorporation, relating to the business of the corporation,
the conduct of its affairs, and its rights or powers or the rights or
powers of its stockholders, directors, officers, or employees" (emphasis
added) .116

111. Under 102(b) (1) "any provision ... defining ...the powers of...
the directors" can be inserted in the certificate if it is not contrary to the laws of
Delaware. No Delaware statute appears to be in direct conflict with removal of
directors without cause.
112. N.Y. Bus. CoRp. LAw 706 (McKinney 1963).
113. Campbell v. Loew's, supra, held that deliberate attempts to harass the
management of the corporation constitutes cause, while the attempt to gain control
of the management does not constitute cause.
114. See, e.g., Model Act 36A.
115. 1953 Law 141 (a).
116. 109(b).
1968] Delaware Corporation Law 429

Unanswered is the degree to which these two sections are inter-

related. A by-law relating to the powers of directors is valid under
109(b) so long as it is "not inconsistent with law." Management by
the board of directors cannot be restricted under 141(a) unless
otherwise so provided in the General Corporation Law. If the word
"law" in 109(b) is interpreted to refer to 141(a) and if the
words "otherwise provided" in 141(a) are interpreted to include
only those provisions directly restricting management by the board and
not 109(b), a by-law restricting the board's discretion would be in-
valid. If, on the other hand, the word "law" is interpreted to refer
only to direct prohibitions against the specific action contemplated
and not to refer to 141(a) and if "otherwise provided" is inter-
preted to include 109(b), such a provision would be valid."
If by-laws restricting the power of the board to manage the business
of the corporation are not valid under 141 (a), the range of by-laws
"relating to the business of the corporation, the conduct of its affairs,
and.., the . .. powers . . . of its directors"11' 8 would be very
limited. The all-inclusiveness of 109 would indicate that the words
"not inconsistent with law" were not intended by the legislature to
refer to 141(a) and the words "otherwise provided in this chap-
ter" were intended to include 109(b).

IV. CONCLUSION

The Delaware General Corporation Law has undergone material

modification. This modification ranges in importance from the signifi-
cant innovation embodied by the close corporations provisions 19 to
the almost inconsequential formal change embodied by the substitution
of "registered" agent for "resident" agent. 2 The new statute not only
enlarges the coverage of provisions in the prior statute, as exemplified

117. Other combinations of interpretations would result either in the by-law

being valid under 109b, but invalid under 141 (a); or in the paradox of the
validity of the by-law under 109(b) depending on the validity of the by-law
under 141 (a), and the validity of the by-law under 141 (a) depending on the
validity of the by-law under 109(b).
118. 109.
119. 341-356.
120. 132.
430 Harvard Journal on Legislation [Vol. 5: 413

by the changes affecting mergers 21 and waiver of notice to meetings," 2

but also covers areas previously covered only by the common law, as
exemplified by the provisions concerning ultra vires' 2 ' and interested
directors. 4
Although the Delaware legislature has resolved certain issues such
as whether stockholder approval is necessary for the mortgage of all
of the assets' 2' and whether directors are liable for unlawful redemp-
tion of stock,126 it has also left unresolved such issues as the scope of
removal of directors12 1 !nd the validity of a by-law restricting the
discretion of directors of publicly held corporations.' 28 Excluding these
unresolved issues, the new Delaware General Corporation Law is a
creditable attempt to meet the problems of modem corporations.

Charles H. Nida"

121. 251, 252, 253, 256.

122. 229.
123. 124.
124. 144.
125. 272.
126. 174.
127. 141 (b).
128. 109(b), 141(a).
*Member of the Class of 1969 in the Harvard Law School.